Property vs Equity as an Investment

Rationale

I happen to have chat with my former colleague on the investment merits of equity versus property, in the context of passive income as primary concern and capital returns being secondary. Under this context, an investment must be one that provides a stable cash flow, either from monthly rentals or dividend payouts.

Property vs Equity

Rents vs Dividend

At first glance, property provides stable rental returns, usually in substantial monthly figures that can supplement or even substitute active incomes from work. Monthly rental figures in the magnitude of $3,000 to $5,000 are reasonable for renting out entire 3-room condominium units in reasonably attractive locations, close to basic amenities like MRT station, food centres etc.

On the other hand, dividend from equities are usually paid out once a year and are far less stable than rents. The amount are usually meagre and are regarded more as extra annual bonus than monthly income supplements.

Leveraged vs Unleveraged Portfolio

But on closer look, the significant difference in payout can be attributed to leverage. To obtain the rental figures listed above, a typical condominium would have cost anything from $700,000 to above $1,000,000. A typical well-to-do middle income household that can afford to purchase a second property would typically have to draw down a housing loan ranging from 80 to 90%. Few from this group will be expected to ‘cash and carry‘ their property.

In contrast, few sensible people who invest in stocks with objective of getting stable dividend returns would take up any loan to finance their purchase. If the typical well-to-do middle income household above who can afford to pay a 20% down payment or $200,000 on a $1,000,000 property, instead use the down payment to for share purchase, it would have earned them only $14,000 in dividend annually or $1167, assuming a 7% dividend yield (a respectable figure in ‘normal’ times). This is way below the $3,000 to $5,000 for rents above. The difference attributed to leverage can hence be seen quite clearly.

What if they are willing to take up a $800,000 loan to buy shares? Combined with their original $200,000, there annual dividend income would have been $70,000 or $5833 monthly, a equally respectable figure. But in both scenarios, I have not taken into account the cost of borrowing. Since equity loan are usually unsecured and the cost of borrowing will be much higher than a comparable housing loan.

Fall out from current financial crisis

Every crisis offers new opportunities. The current credit crisis is no different. Property prices and rents have started falling and could plunge further given weaker demand and greater supply in the years ahead as more new property projects are ready. More information can be found in the URA’s website.

If falling property prices offers opportunities, plunging equity prices offers even greater opportunities, though the risk should be higher (risk must commensurate higher returns). Once built, the condominium should remain there but there is no guarantee the company still exist to honour the claim by the shareholder.

I extract out 7 relatively high and stable dividend play equities from SGX and summarise them in the following table: Read more…

Sell Your Home For More

Sell Your Home For More
By: Linda Jones

You've decided to sell your home. Considering the busy real estate market, selling property may seem like an easy task, but there's more to it than just placing an ad in the paper and accepting the highest bid. There are marketing tricks to learn, legal issues to consider, and obligations to fulfill. So before you sell your home, make sure you do your homework.

Your reason for selling should be the first consideration in the process. Have you found a new home to purchase, are you transferring to another town or country, or do you wish to downsize to a more affordable home? Think of why you want to sell your property, and be prepared to provide an answer to prospective buyers.

Today's real estate trends have seen market values on properties steadily rise. It's a busy industry charged by eager sellers and hungry buyers. Sellers are letting go of a major investment, and have a particular financial goal in mind. Every seller has a profit margin in mind, and few would be willing to let their property go for an underrated amount.

There is another, more important party in the real estate game: the buyer. The most important task facing a seller is attracting a buyer to his or her property. It may not be easy, but it is possible to make your home stand out among the rest.

Selling a home means opening the doors to a world of potential buyers. In order to attract worthy buyers, the seller needs to take note of special tasks to fulfill. The real estate market is continuously changing, and anyone venturing to sell must be very particular with the details that must be attended to.

Your home is your personal castle, and you may feel that it will sell itself solely on the sheer beauty of it. Many homeowners feel that they can woo buyers and cement the deal with details as simple as a fine aroma or pretty foyer. Unfortunately this is not always the case. Home sellers need to prepare their homes from top to bottom in order to reach a top-dollar sale.

Prospective buyers will prepare a shortlist of choice homes to view before deciding on one particular investment. It is up to the homeowner to prepare their home to be the chosen one. The seller must do everything possible to help his or her home stand out among the buyer's list of options. There are several steps that can be taken to attract the buyers.

View your home from a new angle

Pretend that you are the buyer. Take a look at the house from the street, as if you're seeing it for the first time. What do you find attractive, or distracting? What are the elements that really capture your interest? Is yours the type of home that will entice a potential buyer to want to take a closer look? Remember, the first impression is most important. To capture and hold a buyer's attention, take the time to keep your front yard trimmed, gardens neat and your front entry well maintained.

Make repairs

Naturally, buyers are very particular with details. They may be turned off by scratches, dents and faded paint. Inspect your home room by room, and make repairs wherever needed. Be sure that all plumbing and lighting is operational, doors open and close properly, and that the entire house appears to be well maintained. No buyer wants to have to invest time on top of finances.

Keep it clean

Most buyers are immediately discouraged by a messy home, so arrange for a professional deep cleaning before you list your home for sale. If necessary, clean the carpets or have them replaced. Wash the walls or apply a fresh coat of paint. If pests are present in or around your home, hire an exterminator. Poor impressions can lead to bad reputations, so take care and pay attention to every detail.

Get rid of clutter

If you present your home in an orderly fashion, it's easier for buyers to imagine themselves moving in. Create an inviting atmosphere by placing furniture in a cozy, comfortable arrangement. Clear off countertops to create the illusion of space and cleanliness in the kitchen and bathrooms. Storing toys and other household clutter will make it more enjoyable for prospective buyers to view all of the features of your home.

Lighten up

A good lighting system will greatly enhance the atmosphere of your home. Use spot lighting to highlight special features, such as a beautiful piece of artwork. Illuminate dark hallways and stairwells.

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Real Estate Tips for the First Home Buyer

Real Estate Tips for the First Home Buyer
By: Gemma Williams

Buying your first home can be a confusing and daunting experience for the first home buyer. This article takes a look at the costs involved in buying your first home, the first home buyers grant and buying considerations that will help you secure a home that fits your needs.

Defining your Buying Criteria and Budget
Before embarking on your search for the 'perfect' first home, it's helpful to write down a short list of essential elements that you might like, but not necessarily need in a property. This will help narrow down what you really need in a home, and stops you getting caught up in how pretty a property might look, but may be totally unsuitable or out of your price range.

It's also important to make a list of your preferred suburbs, and work out your price range and don't stray from it.

Can I use this property as a stepping stone?
The key to success in real estate is to keep a realistic budget in mind and aim to borrow the least amount possible. Chances are if you are a first home buyer then you are most likely young and can get away with buying a smaller house to start off with. Then step up to buying a larger more expensive home later, when you can afford it. You will be a lot happier with repayments you can actually afford on a smaller loan, and will have money left over to have a comfortable lifestyle.

What should I borrow instead of what they'll lend me...
Banks may be happy to lend you a lot of money, but will the repayments be feasible? Even if you can afford the repayments, will you still have enough cash left over at the end of the week to buy 'little extras' as opposed to just food and bills? It is always wise to buy below your maximum price, which may mean looking at a cheaper suburb or sacrificing that fourth or even third bedroom. It is much better to give up a bedroom, than give up the whole house because you can't afford it.

Do your homework on prices
Do some research , and keep track of the price of homes in your preferred suburb/s to avoid paying too much.

What are the other costs involved?
You need to take into account all the other costs associated with the purchase of a home, and not just the price it's listed for. A property that might seem to be in your budget may exceed it considerably once the other costs are factored in. Based on a loan amount of $400,000 here is a breakdown of some of the additional charges:-

* Settlement Agents fees - $1400
* Registration of Transfer - $172
* Registration of Mortgage - $85
* Bank fees and Charges - $600

Do I have to pay Stamp Duty?
If you are a first home buyer, and the value of a home does not exceed $500,000 then no stamp duty is payable. Where the value of the vacant land does not exceed $300,000 then no stamp duty is payable.

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What is rental yield?

Er, what is rental yield?
Jan 11, 2009 - The Straits Times

Joyce Teo

Where do you see this?
In property brochures or advertisements.

What does it mean?

Rental yield is the annual rental return from a property, or the amount of rent the property earns over a year. It is expressed as a percentage of the purchase price.

The higher the yield, the better the return.

It is calculated this way:


rent x 12 months

------------------------- x 100

purchase price





To work out the net rental yield, you will have to subtract maintenance costs, commissions and other expenses from the rent figure. If you have spent money on renovation, add the amount to the purchase price.

In Singapore, rental yields of 3 to 4 per cent are common.

Why is it important?

It gives you an idea of the returns from your property investment and allows you to compare different properties.

As one of the indicators of the investment potential of a property, it can help you decide on the purchase of an investment property.

Buying versus renting

The rapid increase in property prices has made home ownership difficult for many would-be first time buyers.
Sometimes sacrifices are required in order to fulfill the long term goal of home ownership. Saving strategies, budgeting, and tight financial planning is essential.

Since not everyone is willing or able to make necessary commitments it helps to consider some of the pros and cons of buying and renting as a viable alternative.

Understanding your actual motivation to buy (examining the priorities) vs Keeping aligned with the desired lifestyle

Pros of Buying:

- Fixed cost
No lease conditions, cost of rent, to worry about.

- Security
A sense of security, stability and satisfaction. No worries about the length of your tenancy. A desire to 'own' and build our home.

- Savings
Making repayments is very much a form of forced savings. Once the mortgage is paid off, your financial responsibilities would be significantly lightened.

- Investment
Your home is an equity. If the value is appreciates or maintains value, it is a growing asset. This equity can also be used to secure loans or at the very least, provide retirement security.

- Lifestyle
Fulfilling a desired lifestyle and type of home for it is a huge incentive to own a home. Owning your own home provides the freedom to change and improve your house, and the process itself can become a productive hobby while increasing the value of the property. Whereas time, money and effort spent on decoration and gardening on a rented premise, will not return. Also, in most cases, the landlord would not have allowed any modification. Whereas

- Status
From a financial viewpoint, a homeowner making regular mortgage payments, will establish a favourable credit rating with financial institutions.

- Tax incentives
Interest on mortgage payments are tax deductible. For properties purchased for investment purposes, an investor who lets their property to tenants can take advantage of the tax benefits of negative gearing.

Disadvantages

- Depreciation
There is a risk in any investment that its value will depreciate. When property value depreciates, your flexibility to sell is limited.

- Deposit
The initial deposit alone can easily take up several years of savings.

- Servicing the loan
Installments are a huge financial commitment and would impact the lifestyle which ironically was what you were seeking in getting your own home.

- Interest rates
If your mortgage is subject to a rise in interest rates, repayments become more difficult. While rents may also increases, negotiation with the landlord may be possible, or simply move to more affordable alternatives.

- Unseen costs
Home-ownership can be more expensive than renting when the cost of insurance, maintenance and repairs of the property, council rates cumulates.

- Immobility
Either for career or lifestyle reasons, some people prefer to move around regularly. To them, being bound to one place constraints their sense of freedom. If without a proper investment strategy, the transaction costs in buying and selling every few years may cancel out any appreciation of the property.

4 Common Mistakes Most Home Buyers Make

4 Common Mistakes Most Home Buyers Make
By: Joette Fielding

Buying a home, especially if it is your first time, can be stressful and at times overwhelming. But there are a few key steps you can take before you begin your home search that will help you to be more prepared and know what to expect in the home buying process. And while this guide is not exhaustive it will help to get you started and help to ease some of the stress associated will home buying.

Most home buyers are either not properly prepared for the experience for simply do not know what to expect. Here are the 6 common mistakes most home buyers make and how you can avoid them.

1. Knowing Your Credit Rating.

Most people do not know what their credit rating is or assume that they have good credit. Your credit rating can influence the lenders decision on not only how much of a mortgage you qualify for but also what your mortgage interest rate will be. A simple credit check through companies such as Equifax will confirm your credit standing and allow you to correct errors that there might be before you apply for a mortgage.

2. Get Pre-Approved.

Most buyers do not know the difference between being pre-qualified for a mortgage and being pre-approved. A pre-qualification will only serve as a guide as to how much you can afford to buy. A pre-approval is a commitment from a lender which states the purchase price and interest rate that you qualify for and is guaranteed by the lender for a specific period of time. This is usually 90-120 days. Knowing how much you can buy a home for will save you time by only concentrating on applicable homes and having a commitment in writing from a lender will give you more confidence in you search.

3. Use A Mortgage Broker

Shopping for a mortgage that's right for you can be tricky and could also hurt your credit rating. Did you know that every time you apply for a mortgage your credit rating is checked and that check is recorded on your credit report? Too many credit checks and a lender my be less inclined to give you the best rate. A mortgage broker will not only be able to shop for a mortgage on your behalf without damaging your credit rating, but can also discuss different mortgage options that better fit your circumstances. There is more to getting a mortgage than just looking at the interest rate.

4. Verify Closing Costs.

Once you have signed on the dotted line you do not want any surprises when the deal closes and you try to take possession of your new home. Apart from the down payment you will need extra funds to pay your lawyer's fees, property taxes, land transfer taxes and the like. Make sure that your real estate professional can explain all of the additional costs you will have to come up with on closing as the amount could be an extra few thousand dollars.

This is by no means meant to scare anyone from buying a home, READ MORE